MNI ASIA OPEN: Tsy Yields Surge Ahead FOMC

EXECUTIVE SUMMARY

• Sharp Rise in Tsy Yields Ahead FOMC, 10Y One Year High: 1.6405%
• Tsy Yield Curves On the Move: 5s30s: 155.628 High
• In-Line PPI: +0.5%, EX FOOD, ENERGY +0.2%
• Supplementary Leverage Ratio (SLR) Exemption Expiration Nears: Wed, March 31
• MOST OF ITALY TO ENTER LOCKDOWN ON MARCH 15 AS INFECTIONS RISE

US

US TSYS: Another day closer to the Supplementary leverage ratio (SLR) exemption expiration Wednesday, March 31 and still no word from the Fed gov's on decision over extending (widely expected) or letting it expire -- necessitating banks to scale back their deposits, reserves, and Tsy holdings.

• TD Securities estimates a 60% of a temporary extension that could last several months, 25% chance of a "permanent extension" and only 15% the exemption will expire.
• Expiration repercussions: tighter (read more negative) swap spreads as banks that have been the largest private underwriters of Tsys debt issuance during the pandemic are forced to unwind. Tighter balance sheet constraints, would "push repo rates higher. We are also concerned about market functioning around stress events such as Treasury auctions, as SLR creates frictions for dealer intermediation," TD wrote.
• TD also "expect money market rates to remain low amid heavy reserves growth and a decline in bill supply. We remain mindful of trends in bill issuance given the passage of the stimulus package."
• Credit Suisse Zoltan Pozsar weighs in suggesting an exemption of reserves and Tsys and is no panacea for globally systemic important banks (GSIBs) where their surcharge would still come into play.
• Citing JP Morgan's GSIB score of 815 on Dec 31, 2020, the "bank's CET1 target and G-SIB surcharge effectively operate as an 'asset-cap' for the bank, which the permanent exemption of reserves and Treasuries from the SLR will not solve: even if there is an SLR exemption, the bank won't be able to increase assets." Zoltan concludes while it would make share buybacks easier for banks, SLR exemption/extension would not help alleviate balance sheet constraints.

OVERNIGHT DATA

• US FEB FINAL DEMAND PPI +0.5%, EX FOOD, ENERGY +0.2%
  
• US FEB FINAL DEMAND PPI EX FOOD, ENERGY, TRADE SERVICES +0.2%
• US FEB FINAL DEMAND PPI Y/Y +2.8%, EX FOOD, ENERGY Y/Y +2.5%
• US FEB PPI: FOOD +1.3%; ENERGY +6.0%
• US FEB PPI: GOODS +1.4%; SERVICES +0.1%; TRADE SERVICES +0.1%

• CANADA Q4 INDUSTRIAL CAPACITY UTILIZATION RATE 79.2%
• CANADA FACTORY CAPACITY UTILIZATION RATE 76.2%
• CANADA JAN WHOLESALE SALES +4.0%; EX-AUTOS +4.6%
• JAN WHOLESALE INVENTORIES +0.7%: STATISTICS CANADA

• CANADA FEB EMPLOYMENT +259.2K; JOBLESS RATE +8.2%
• CANADA FEB FULL-TIME JOBS +88.2K; PART-TIME +171.0K

MARKETS SNAPSHOT

• DJIA up 225.34 points (0.69%) at 32709.43
• S&P E-Mini Future down 3.75 points (-0.1%) at 3923.5
• Nasdaq down 128 points (-1%) at 13270.85
• US 10-Yr yield is up 9.7 bps at 1.6335%
• US Jun 10Y are down 26.5/32 at 131-25
• EURUSD down 0.0037 (-0.31%) at 1.195
• USDJPY up 0.54 (0.5%) at 109.05
• WTI Crude Oil (front-month) down $0.51 (-0.77%) at $65.51
• Gold is down $0.45 (-0.03%) at $1722.34

European bourses closing levels:

• EuroStoxx 50 down 12.28 points (-0.32%) at 3833.36
• FTSE 100 up 24.51 points (0.36%) at 6761.47
• German DAX down 67 points (-0.46%) at 14502.39
• French CAC 40 up 12.79 points (0.21%) at 6046.55

US TSY SUMMARY: Tsys Have That Heavy Feeling, FOMC Next Week

• Not much of a react to PPI, more or less in-line with expectations (FINAL DEMAND PPI +0.5%, EX FOOD, ENERGY +0.2%). Tsy futures holding to relative narrow range -- near lows over last four hours. Moderate buying in 10s-30s was short lived.
• Lack of clarity adding to pressure in rates: another day closer to Supplementary leverage ratio (SLR) exemption expiration on Wed, Mar 31, and still no word from Fed gov's over extending (widely expected) or letting it expire -- necessitating banks to scale back their deposits, reserves, and Tsy holdings.
• Decent option trade, put buys/heading rate hikes in late '22 through '23 continue; vol sale on range: Block, -40,000 short Sep 96/97 strangles, 12.0 vs. 99.67, -5.6k more/screen. Salient Tsy option highlight: +32,000 TYM 129/130/131/132 put condors 12 on screen.
• The 2-Yr yield is up 1bps at 0.149%, 5-Yr is up 5.9bps at 0.8449%, 10-Yr is up 9.7bps at 1.6335%, and 30-Yr is up 10.6bps at 2.4005%.

US TSY FUTURES CLOSE: Near Lows

Broadly weaker/near lows late Friday, yields making new one-year highs, steeper yield curves climbing back to near 7 year highs tapped Feb 25. Focus on next week's FOMC

• 3M10Y +10.39, 159.779 (L: 148.694 / H: 161.009)
• 2Y10Y +8.515, 147.724 (L: 138.713 / H: 148.554)
• 2Y30Y +9.124, 224.082 (L: 214.161 / H: 225.188)
• 5Y30Y +4.162, 154.848 (L: 150.175 / H: 155.628)
• Current futures levels:
• Jun 2Y down 1/32 at 110-12 (L: 110-11.375 / H: 110-13.125)
• Jun 5Y down 9.5/32 at 123-22.75 (L: 123-19.5 / H: 124-00)
• Jun 10Y down 25.5/32 at 131-26 (L: 131-23 / H: 132-18)
• Jun 30Y down 2-09/32 at 155-20 (L: 155-12 / H: 157-24)
• Jun Ultra 30Y down 4-00/32 at 182-16 (L: 182-03 / H: 186-09)

US EURODOLLAR FUTURES CLOSE: Weaker, Mirror Tsy Curve

Futures traded broadly weaker Friday, at/near session lows with the long end of the strip underperforming. Heavy selling in Whites through Greens as markets warm to thought of tighter policy late 2022-2024. Heavy selling lead quarterly EDH1 after 3M LIBOR set' +0.00562 to 0.18950% (+0.00412/wk).

• Mar 21 -0.005 at 99.810
• Jun 21 steady at 99.835
• Sep 21 -0.005 at 99.810
• Dec 21 -0.015 at 99.750
• Red Pack (Mar 22-Dec 22) -0.035 to -0.01
• Green Pack (Mar 23-Dec 23) -0.06 to -0.045
• Blue Pack (Mar 24-Dec 24) -0.095 to -0.07
• Gold Pack (Mar 25-Dec 25) -0.12 to -0.105

Short Term Rates

US DOLLAR LIBOR: Latest settles:

• O/N +0.00000 at 0.07813% (+0.00050/wk)
• 1 Month +0.00013 to 0.10613% (+0.00288/wk)
• 3 Month +0.00562 to 0.18950% (+0.00412/wk) (Just above Record Low of 0.17525% on 2/19/21)
• 6 Month +0.00125 to 0.19400% (-0.00188/wk)
• 1 Year +0.00088 to 0.27813% (+0.00038/wk)

• Daily Effective Fed Funds Rate: 0.07% volume: $67B
• Daily Overnight Bank Funding Rate: 0.07%, volume: $216B

• Secured Overnight Financing Rate (SOFR): 0.01%, $884B
• Broad General Collateral Rate (BGCR): 0.01%, $371B
• Tri-Party General Collateral Rate (TGCR): 0.01%, $346B
• (rate, volume levels reflect prior session)

• Tsy 0Y-2.25Y, $12.801B accepted vs. $32,234B submission
• Next scheduled purchases
• Mon 3/15 1010-1030ET: Tsy 20Y-30Y, appr $1.750B
• Tue 3/16 1010-1030ET: Tsy 4.5Y-7Y, appr $6.025B
• Wed 3/17 No buy operation due to FOMC
• Thu 3/18 1010-1030ET: Tsy 20Y-30Y, appr $1.750B
• Fri 3/19 1010-1030ET: TIPS 1Y-7.5Y, appr $2.425B

PIPELINE: $25B Verizon Deal Outpaced Thu's 30Y Bond Auction

Sole issuer for Friday: $1.1B Bell Canada comes after after Thursday's huge $25B 9pt issue from Verizon, $1B more than the US Tsy bond auction and oversubscribed too. Issue size at low end of estimate, appeared some prop/fast$ accounts had anticipated larger issuance and had sold along with hedges -- contributed to the bounce in Tsys after the 30Y Bond R/O auction tailed slightly. Verizon still holds record of largest debt launch ever at $49B total in August 2013.

• 03/12 $1.1B #Bell Canada $600M 3Y +45, $500M 30Y +127

• Date $MM Issuer (Priced *, Launch #)
• 03/11 $1.75B *Verizon 3Y +45, $750M 3Y FRN SOFR+50
• 03/11 $2.75B *Verizon 5Y 70, $750M FRN SOFR+79
• 03/11 $3B *Verizon 7Y +90
• 03/11 $4.25B *Verizon 10Y +107
• 03/11 $3.75B *Verizon 20Y +120
• 03/11 $4.5B *Verizon 30Y +130
• 03/11 $3.5B *Verizon 40Y +145

FOREX: USD/CAD Downtrend Resumes

• CAD outstripped all others Friday, with USD/CAD resuming the 2021 downtrend on the break below 1.2468. CAD strength followed a stellar Canadian jobs report for February, in which Canada added over 3 times as many jobs as forecast, with a decent bounce across both full and part-time positions. This saw the unemployment rate shed a whole 1.2ppts to new pandemic-era lows.
• Persistent USD strength was evident throughout Asia-Pac and European hours as US yields rallied and the Treasury Curve steepened. This saw the USD Index bounce off the weekly post-ECB lows before price action faltered into the US close, with the greenback rolling off the day's best levels ahead of the close.
• SEK, NZD and GBP were among the poorest performers Friday, CAD, USD and NOK the strongest.
• Focus for the coming week rests on a frenetic five days for central banks. Rate decisions are due from the US, UK, Norway, Japan, Russia, Turkey, Brazil and Indonesia among others.
• On the data front, the Australian jobs report, Japanese CPI and US retail sales are all due.

EGBs-GILTS CASH CLOSE: Bunds Fail To Hold Onto Initial ECB Rally

European core FI curves ended the week steeper, notably Bunds which failed to hold onto Thursday's post-ECB decision rally.

• Friday's weakness was largely a result of some push-back among ECB policymakers in the 24 hours since the decision (pointing out that they are merely accelerating and not increasing the total volume of PEPP), and a sell-off in US Tsys.
• Periphery spreads finished mixed, with Italy a little tighter despite news of broader lockdowns and wider fiscal deficits coming.
• Gilts underperfomed. Earlier, Jan UK GDP was contractionary but less so than expected.
• The Europe focus next week is on the Bank of England meeting, which comes a day after the global focal point of the Federal Reserve decision.

Closing yields/10-Yr Spreads to Bunds:

• Germany: The 2-Yr yield is up 0.4bps at -0.687%, 5-Yr is up 1.3bps at -0.619%, 10-Yr is up 2.8bps at -0.306%, and 30-Yr is up 4bps at 0.221%.
• UK: The 2-Yr yield is up 1.9bps at 0.099%, 5-Yr is up 5.4bps at 0.381%, 10-Yr is up 8.7bps at 0.822%, and 30-Yr is up 9.2bps at 1.352%.
• Italian BTP spread down 0.6bps at 92.9bps/ Spanish up 0.5bps at 63.5bps